Every week Kelley Greene’s Focus on Retirement Segment in the Wall Street Journal is excellent, this week is no exception. If anyone has any money left their IRA and would like to donate it to a charity…here are some details.
http://online.wsj.com/article/SB122489075823068591.html
Basically what it says is if you are 70 1/2 or older you can donate up to $100,000 from your IRA tax free to a qualified charity. The same does not hold for a 401(k) or 403(b).
Funding a tax-deductible Traditional IRA will garner you an immediate tax break, investments grow tax deferred, but withdrawals are taxed as ordinary income. A Roth doesn’t offer an immediate tax deduction but investments grow tax deferred and withdrawals are tax free. Unfortunately, if you are covered by a retirement plan at work and make more than $116,000 if you are single and $169,000 if you are married filing jointly – you can’t contribute to either.
Non deductible IRAs in the past were a very un-popular investment vehicle. Contributions are not deductible on your tax returns, they grow tax deferred but are withdrawn at regular income tax rates. However, in 2006 a new law was passed that said in 2010 individuals who were restricted from contributing to a Roth IRA are allowed to convert their non deductible and deductible Traditional IRAs to Roth IRAs regardless of salary.
Converting your non deductible to a Roth in 2010 without paying additional taxes is an excellent strategy. However, be careful not to trigger more tax liability! Lets say you have $100,000 in a regular Traditional IRA and $25,000 in a non-deductible account. You would owe taxes on the $21,000 because it would be assumed that the $25,000 was coming pro rata from the whole IRA rather than just the non deductible IRA. You don’t want to pay taxes twice so what can you do?
Solution #1: Roll the deductible portion of your Traditional IRA into a 401(k) if allowed. Then when you go to roll over the non deductible portion into a Roth you will not be double taxed!
Solution #2: Even if you have a large IRA that you don’t want to mingle with non deductible IRA money to be converted, your spouse may not. If not, your spouse can fund a non deductible IRA until 2010 and then convert it to a Roth.
There are a million and one things to think about when you leave a job for a new one. New office dynamics, tasks and responsibilities, even new lunch options! There is one item that comes with leaving an old job that often gets overlooked. What to do with your previous company retirement account, your 401(k) or 403(b). You have three options: rollover your old account into an IRA account, keep your money in your previous employer’s plan or rollover the old account to your new employer’s plan.
What is one to do? The answer to this question depends on a few things! I present the pros and cons below.
Benefits of an IRA Rollover:
Your Old Plan May Be a Bad Deal – It is truly amazing how many bad plans are out there. Some plans impose atrocious expense rates, wrap charges and other needless costs.
Expand Your Investment Options – Most plans, even the good ones, restrict their participants to a few investment options. Roll your money over into an IRA and you have unlimited options.
Consolidate Your Accounts – By consolidating your old plans into a single IRA you can manage your portfolio in a single account and get complete picture of your investments all in one place. Even more importantly, by rolling out several accounts into one you can sometimes save on expenses.
Avoid the Money Market Trap – In some cases, if your former employer is unable to make contact with you and your previous investment choices in your plan are no longer available, your investments may be placed in some sort of stable principal fund. If you forget to follow up, it may be years before you realize that your hard earned retirement investment is earning 2% a year.
Tracking Your Money – Many plans do not use ticker symbols and are not easily trackable. In many cases this is true for companies whose plans are managed by an insurance company (ING, Hartford etc.) By rolling-over your plan into an IRA you will be able to invest your money in funds for which a public price is posted on a daily basis.
Benefits of Leaving Your Money in Your Old Plan:
Tax Benefits If You Hold Company Stock – This is beyond the scope of this article but if you have company stock in your company retirement plan, contact a financial advisor before initiating a rollover.
Benefits of Rolling Over Into Your New Employer’s Plan:
Ability to Borrow Penalty Free – This is a highly unadvisable strategy but it is a benefit of an employer plan versus an IRA.
Penalty Free Withdrawals at Age 55 – You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. To do so, you must terminate your employment no earlier that the year in which you turn age 55.
The decision whether or not to rollover funds is not always cut and dry. Do your research and choose wisely! And remember, a rollover contribution doesn’t count toward annual IRA contribution limits — you can still make your regular contribution. Also, don’t forget to keep investing in your current employer’s retirement plan — at least enough to collect the full amount of your current employer’s matching contributions. Your retired self will thank you.
Please contact Dollars & Sense Education to bring our seminars to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
http://www.daseducation.com
nicole@daseducation.com
215-499-3834
Independent’s Week is officially over! I hope all of the self employed people out there enjoyed my detailed blog entries about the differences between all of your options for retirement plans. In the chart below I summarize your options, key details and the pros and cons of each plan. Enjoy.
For the rest of this series:
Please contact Dollars & Sense Education to bring our seminars to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834
Ok folks, another entry for the self starters out there! Part 4 of how to sock your money away for retirement for the self employed. Non self employed folks, come back next week and I’ll some good stuff for you! So let’s do this… Part 4 – The Keogh.
Keogh plans are the self-employed equivalent of corporate retirement programs. They come in two basic flavors: profit-sharing plans and defined benefit pension plans.
Annual contributions to Keogh profit-sharing plans are based on a percentage of self-employment income or compensation and subject to a $45,000 ceiling. A plan document must be drafted in Year One (this may cost a couple hundred bucks), and the IRS demands an annual report (you can probably do this yourself).
Keogh defined benefit pension plans are designed to deliver a targeted annual retirement benefit, which can be as high as $180,000. Each year’s contribution must be calculated by an actuary — the exact amount depends on your income, the target benefit, years until retirement and anticipated investment returns. Annual actuarial fees and the required IRS report can run up to a couple grand. Another negative: You’re locked into making the actuarially determined contribution each year. However, if you make good bucks and are over 50, a defined benefit plan may be worth all the trouble — because it permits much bigger contributions than any other type of program. If you’re younger, go with a SEP, profit-sharing Keogh or Solo 401(k).
To put this entry in perspective, the Keogh plan is quite complicated and probably not appropriate for most self employed folks out there. Keogh setup and ongoing fees for paperwork and for professional guidance are more suited to self-employed individuals with established businesses and consistent incomes. One reason behind this limited parameter is that once you open a determined benefit contribution plan, you’re locked into that contribution every year.
Do I Qualify For A Keogh?
Any sole proprietors, partnerships, LLCs, and anyone with self-employment income.
Are Keogh Contributions Pre or Post Tax?
Keogh plan contributions are deducted from pre tax income and contributions and interest income are tax deferred until withdrawal.
Where Do I Set Up a Keogh?
A Keogh plan is something you REALLY want to talk to a live financial advisor about.
How Much Can I Contribute Annually to a Keogh for myself?
You will encounter the same $45,000 ceiling for contributions to a Keogh profit-sharing plan but you can set a ceiling as high as $180,000 for a defined benefit Keogh plan.
Why Not Just Open a Traditional or Roth IRA?
Do Both!
When Do I Set This Up?
If you are establishing a plan for the first time, complete the Adoption Agreement(s) by December 31 (Simplified Keogh plan) or your fiscal year-end (Standard PSP/MPP plan), and you will be eligible for a deductible contribution for this year.
What If I Already Participate In My (Other) Employers Plan?
I was not able to get a definitive answer about this.
Do I Have to Put Away the Same Amount of Money Every Year?
With a profit-sharing plan you can vary annual contributions from 0 – 25% of compensation per year or skip a year if business conditions change.
With a defined benefit pension plan you make fixed contributions each year (1 – 25% of compensation) as your commitment to retirement benefits but once you select a percentage, you must contribute that same percentage each year, no more and no less. This contribution cannot be changed unless you amend the plan.
What If I Have Employees?
I was not able to get a definitive answer on this one!
Next Stop!
In Part 5 I will sort out what plans make sense for your individual situation!
For the rest of this series:
Please contact Dollars & Sense Education to bring our seminars to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834
More Retirement Accounts for the Self Employed! Cmon. I know its dry, I know. But its like eating vegetables, its goooooooood for you. He He. The good news is if you are not self employed, you don’t need to bother reading. If you are self employed – read on brothers and sisters! Don’t you want to learn the best way to shelter your income? If you have employees, don’t you want to help them save for retirement? So let’s go. Part 3 – The Simple IRA. Part 4 of this series will describe the KEOGH and the last entry, Part 5, will discuss what options are appropriate for you according to the kind of business you have and your goals!
Do I Qualify For A Simple IRA?
Employers are eligible to establish and maintain a SIMPLE plan only if the employer:
No more than 100 employees (including self-employed individuals) who earned $5,000 or more in compensation during that year; and;
No other qualified retirement plan, 403(b), or SEP at the same time.
Pre or Post Tax Contributions?
Simple IRAs are pre-tax contributions.
Where Do I Set Up a Simple IRA?
The usual: Vanguard, Fidelity, ETrade, TRowe Price, etc.
How Much Can I Contribute Annually to a Simple IRA for myself?
Max contribution: up to $10,500 (2007) as an employee an an employee for a total of $21,000 (2007). If you are 50 or over, you can contribute a total of $26,000 (2007) of PRE-TAX money.
Why Not Just Open a Traditional or Roth IRA?
Do both if your income makes you eligible for a ROTH IRA or Traditional IRA.
When Do I Set This Up?
Deadline to open an account is Oct 15th of the reported tax year.
What If I Already Participate In My (Other) Employers Plan?
Make sure you stay under the annual limits for total contributed to all employer sponsored plans! So between your SIMPLE IRA and the other employer’s 401K your own contribution cannot exceed a total of $15,500 for 2007 or $20,500 if you are 50 or over.
Do I Have to Put Away the Same Amount of Money Every Year?
No.
What If I Have Employees?
The SIMPLE IRA has a mandatory employer contribution requirement. This contribution requirement can generally be made as follows:
Anything Else?
There are such a thing as SIMPLE 401Ks but there is no benefit to this plan as you still have the lower SIMPLE limits $10,500 (2007) and more administration.
Next Stop!
In the next installment of this series (Part 4 of 5) I will describe another kind of retirement account for the self-employed – The KEOGH! In the Part 5 I will sort out what plans make sense for your individual situation!
Other great blog entries and articles on Simple IRAs:
http://www.irs.gov/retirement/article/0,,id=111420,00.html
For the rest of this series:
It seems like October is Independent’s Month at Dollars & Sense Education! I just helped a client who is a Realtor (1099 employee) rollover a 401K from an old employer into a SEP-IRA with Vanguard. If you are self employed or have a side business you can start your own retirement accounts.
When you are self employed there are retirement vehicles that are made specifically for you and can allow you to sock away alot of tax deferred moolah. Independent contractors, sole proprietors and business owners can sign up for:
Part 1 of this series will describe the SEP IRA. The next three entries will describe the other options and the last entry will discuss what options are appropriate for you according to the kind of business you have and your goals!
Do I Qualify For A SEP IRA?
To qualify you must have self-employment income. Self-employment income consists of net profits from a Schedule C or Schedule F on your tax return, or guaranteed payments from a partnership. If you run an S-Corporation, your corporation will have to set up the SEP-IRA and deduct your contributions from your W-2 salary. You must open and contribute money to a SEP-IRA plan by the due date of your tax return.
Where Do I Set Up a SEP IRA?
SEP IRAs can be setup with the same companies that provide Traditional IRAs and ROTH IRAs although the fees will vary slightly from traditional IRA and ROTH IRAs.
How Much Can I Contribute Annually to a SEP IRA for myself?
Your annual maximum contribution to a SEP-IRA is 20% of your net earnings minus self employment tax from self-employment income or $45,000 (for 2007), whichever is less.
Why Not Just Open a Traditional or Roth IRA?
Do both! You can sock away money in both a SEP IRA, ROTH IRA and a Traditional IRA. You can still contribute to a Roth IRA or a Traditional IRA if your modified gross income is under approved limits. Your employee contribution is capped at $4,000 regardless of the type of IRA you use. Where you sock away the extra dough is the employer contribution (up to $45,000) in the SEP IRA.
What If I Already Participate In My (Other) Employers Plan?
You can have your cake and eat it too! Sock your money away in a SEP IRA and a 401K!
When Do I Set This Up?
This can be setup until you file your taxes, including tax extensions.
Do I Have to Put Away the Same Amount of Money Every Year?
No.
What If I Have Employees?
A SEP allows for a contribution of up to 25% of your employees’ salary per year at a maximum of $45,000 (2007). An employee is defined as at least 21 years old and must have worked for you 3 out of the last 5 years. Contributions to employees SEP IRA MUST BE UNIFORM – that is if you contribute 20% to one employee’s account, you must contribute 20% to all.
Employees cannot contribute to their SEP, unless they are self employed obviously. Employees can contribute to a Roth IRA or a Traditional IRA if their modified gross income is under approved limits. If in the calendar year, the employer doesn’t contribute to the SEP IRA, the employees can contribute to the Traditional IRA regardless of income.
Summary
In short, if work for yourself take full advantage of the tax benefits that affords you. A SEP IRA allows you to defer a significant portion of your retirement savings from taxes. Don’t let Uncle Sam get more than his fair share!
In the next installment of this series (Part 2 of 5) I will describe another kind of retirement account for the self-employed – The Solo 401K!
Other great blog entries on SEP IRAs:
http://www.bargaineering.com/articles/primer-on-self-employment-taxes-or-why-sep-iras.html
http://www.sitelead.com/blog/how-a-sep-ira-can-cut-your-taxes/2007/04/05
http://www.fivecentnickel.com/2006/10/19/opening-a-vanguard-sep-ira-and-executing-a-direct-rollover/
http://taxes.about.com/b/a/257220.htm
Please contact Dollars & Sense Education to bring our “Financial Health 101″ seminar to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834
In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement. In Part 2, I talked about the different options that exist for retirement savings. In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings. In Part 4, I discussed how and where you go to sign up for your 401K, 403B and IRA. In this final installment, Part 5 of this series, I discuss good investment options for your IRAs, 401Ks and 403Bs.
1) Determine the Appropriate Asset Allocation for Your Age and Risk Tolerance
Diversification is a powerful investment concept. It refers to saving your investments in different baskets. Diversification requires you to place your money in different investments with returns that are not completely moving in the same direction at the same times. When some of your investments are up, others will be down. To decrease your chances of getting clobbered at the same time, you must put your money in different investments such as stocks, bonds and cash. You can further diversify your investments by investing in domestic as well as international markets. The process of how you spread your money around and diversify is called “asset allocation”. The wise approach is to have more risk (equities) in your younger years and as you move into retirement move the majority of your money into less risky assets (bonds and cash). There are many different ways to allocate your assets for retirement, but below I outline one possibility.
Age: Less than 40 years
Allocation: 100 % in stocks. Of this, 40% invested in large cap-growth funds, 25% in small-cap growth funds, 25% in large-cap value funds, and 10% in international.
Age: 40 – 50 years
Allocation: 80 % in stocks and 20% in bonds. Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% large-cap value funds, and 10% in international.
Age: 51 – 55 years
Allocation: 70% in stocks and 30% in bonds. Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% in large cap value funds, and 10% in international.
Age: 55 – 60 years
Allocation: 50% in stocks and 50% in bonds. Of the bonds portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large cap value funds, and 10% international.
Age: 60 – 65 years
Allocation: Reduce stocks by 5% per year and increase bonds by 5% per year so that at retirement you have 25% in equities and 75% in fixed income. Of the equity portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large-cap value funds and 10% international.
2) Choose High Quality/Low Cost Funds
The second factor to take into account when you are choosing the mutual funds in your accounts is cost. Typically the lowest cost funds that one can buy are index funds. An index fund is a fund that merely tracks a specific financial market. For example an S&P 500 index fund just copies the movement of large cap stocks. A Russell 2000 index is used to track small cap companies. Index funds do not have managers making decisions about what to invest in so they are less expensive. They also tend to outperform actively managed, more expensive funds. So if these are an option within your plan, take advantage of them to carry out your asset allocation strategy.
If actively managed funds are your only option, invest in them but be wary of expenses associated with the fund. Actively managed funds have expense ratios and loads that eat into your returns. Minimize these costs as much as possible!
3) Rebalance Your Portfolio Annually
The great thing about investing for retirement is that once you are set up you really don’t have to do much. Just once a year look at your portfolio and make sure your investments still match up with the asset allocation you want. Because your investments grow at different rates, this can throw off your asset allocation. Make sure you rebalance it every year!
I hope you have enjoyed this 5 part series on Investing for Retirement. Please contact me with any questions or clarifications!
Please contact Dollars & Sense Education to bring our “Financial Health 101” seminar to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834
In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement. In Part 2, I talked about the different options that exist for retirement savings. In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings. In this installment of the series, I will discuss how and where you go to sign up for your 401K, 403B and IRA. Signing up for a 401K or 403B is quite easy. Picking the right company for your IRA is more complicated. In this post I will attempt to make picking a company for your IRA as easy as possible.
Where to Open a 401K and 403B
If your company offers a 401K or 403B, opening one is quite easy. Just contact the HR office of your company and ask them for the paperwork!
Where to Open a Traditional or Roth IRA
1) Full Service Brokerages – Merril Lynch, TD Ameritrade, Wachovia, etc. These are my least favorite options unless you really feel like you cannot do this on your own. They provide investment advice but are very expensive. If you want to use this option you can go online to find your nearest branch office.
2) Online Discount Brokerages – ShareBuilder, Scottrade, Firsttrade, Zecco, ETrade etc.
Discount brokers appeal to many people because they have low or no minimums to open an account. Short term, online discount brokerages can be a good alternative if you only have a small amount to invest (less than $1,000) and you are not willing to make automatic contributions of at least $50/month. If you are a mutual fund investor, opening an online brokerage account should only be a short term bridge to opening an account at one of the big three mutual fund companies. Discount brokers are a good option if you’re primarily interested in purchasing individual stocks instead of mutual funds, but for most casual investors this is not advised.
3) Banks – Bank of America, Commerce Bank, Citizens Bank, Washington Mutual, etc. Another option if you’re short on cash to open an IRA at a mutual fund company is to open an CD-based IRA at a bank until you’ve saved enough for the minimum initial deposit at one of the three big mutual fund companies. This is only a short term option. As soon as you have at least $1,000 you should be rolling you IRA over to a mutual fund company.
4) Mutual Fund Companies – In my opinion, mutual fund companies are the best place to open your IRA. However, they have fairly high minimums for investing. Fidelity Investments, The Vanguard Group and T. Rowe Price are the three largest mutual fund companies and signing up for all three can be done easily online. I will provide key details for each company so that you can properly evaluate which company best suits your needs.
Fidelity Investments
Fees: No fee.
Minimum Investment: $2,500 minimum initial deposit, but this is waived if you commit to at least $200/month automatic contributions.
Additional Contributions: Minimum of $250 unless you commit to at least $200/month automatic contributions.
The Vanguard Group
Fees: No fee
Minimum Investment: $1000 minimum initial deposit to purchase the company’s STAR fund. (The STAR fund is a mutual fund of mutual funds, a safe choice for beginners.) Most other funds at Vanguard have a $3000 minimum.
Additional Contributions: Minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50.
T. Rowe Price
Fees: $10/year per mutual fund owned for Roth IRA accounts until you have a balance above $5,000 for each mutual fund or an aggregate of $50,000 invested, after which there is no fee.
Minimum Investment: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.
Additional Contributions: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.
How to Open an IRA
Some firms require that you download the forms and then to mail or fax them to the company. Most companies, however, provide online applications. Before you begin the application, you will need the following:
Once you’ve completed the application process, you will be asked to transfer money to your account. This money will probably earn interest in a money market fund until you choose an investment. In the final installment – Part 5 of this series, we’ll discuss good investment options for IRAs and 401Ks. Stay tuned!
Please contact Dollars & Sense Education to bring our “Financial Health 101″ seminar to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834
Okay, I think we are well on our way to saving for retirement. In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement. In Part 2, I talked about the different options that exist for retirement savings. In this installment, I will show you how to efficiently use the options that exist for your retirement savings.
In order to make an informed decision, the first thing you need to do is decide how you see your lifestyle during retirement. There are three options:
1) You will not work at all.
2) You will work in some capacity.
3) You are not sure if you will or will not work after retirement.
Your retirement savings decisions are highly dependent on which of these categories you see yourself in.
If you are not going to work and will live solely off your retirement income, it makes more long term sense to max out your 401K, 403B or traditional IRA before investing in a ROTH IRA.
If you are going to work or are not sure if you are going to work in retirement, it makes more long term sense to contribute to your 401K/403B up to your company match, then max out your Roth IRA and then max out your employee sponsored plan. If you do not have an employee sponsored plan, max out your Roth IRA first and then max out your Traditional IRA.
These assumptions are made based on the current income tax rates. If these were to increase significantly, my advice would be very different. If you are not sure if you are going to work in retirement or you are wary of income tax increases in the future – by all means utilize the ROTH IRA after taking advantage of any free money match from your employer. It is a way to diversify your tax risk. But if you know you want to relax on the beach, not work, and are confident that tax rates will stay constant or decline than make the most of your employer sponsored plan or Traditional IRA before participating in the ROTH IRA.
Now you know that you should save for retirement, you know what vehicles are out there and what make the most sense for you to use – In Part 4 I will show you how to sign up for these retirement vehicles and get in the game. Stay Tuned!
Please contact Dollars & Sense Education to bring our “Financial Health 101″ seminar to your company or organization!
Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834
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